Mumbai: The Reserve Bank of India (RBI) left interest rates unchanged on Thursday and warned of resurgent inflation risks, a hawkish stance that disappointed investors clamoring for the first rate cut since the aftermath of the global financial crisis.
The RBI kept its policy repo rate on hold at 8.50 per cent, as had widely been expected. It kept the cash reserve ratio unchanged at 4.75 per cent after a 75 basis point-cut on Friday in a surprise off-cycle move to ease tight banking system liquidity.
While market hopes had risen that the RBI would finally begin lowering rates after 13 increases between March 2010 and October 2011, it opted not to make a move before Friday's federal budget release for the fiscal year starting April 1.
"Upside risks to inflation have increased from the recent surge in oil prices, fiscal slippage and rupee depreciation," the RBI said in its mid-quarter policy statement, adding that future actions will be towards lowering rates but refraining from giving a time frame.
Growth in Asia's third-largest economy slowed to 6.1 per cent in the three months to December, the weakest in almost three years, and is on track to fall just short of 7 per cent in the fiscal year that ends this month.
"Notwithstanding the deceleration in growth, inflation risks remain which will influence both the timing and magnitude of future rate actions," the RBI said.
The central bank's next policy review is on April 17, and many economists and traders had expected it to cut rates then.
That outlook has been clouded by renewed worry about the government's ability to get its fiscal deficit under control after Wednesday's move to raise railway fares for the first time in eight years unleashed a political storm, underscoring the weakness of India's ruling coalition.
India is on track to miss its target of cutting the fiscal deficit to 4.6 per cent of GDP in the current fiscal year by more than a per centage point, thanks to a sluggish economy and a ballooning subsidy burden under a populist-leaning Congress party government.
The RBI has said it will be constrained from cutting rates in the absence of credible fiscal consolidation.
"A rate cut in April depends on what the government budget delivers. If it is deemed expansionary/inflationary then chances of a RBI rate cut are reduced," said Jonathan Cavenagh, FX strategist at Westpac in Singapore.
MARKETS DISAPPOINTED
Bond and interest rate swap markets were disappointed with the RBI's focus on inflation, while the BSE Sensex extended falls, dragged down by banking shares.
The 10-year benchmark bond yield rose 4 basis points to 8.34 per cent immediately after the policy release while the benchmark five-year swap rate was 6 basis point higher at 7.55 per cent, and the one-year rate 7 basis points up at 8.12 per cent.
"RBI is not as dovish as expected. It has, rather, sounded cautious on inflation," said Vivek Rajpal, India rate strategist at Nomura in Mumbai.
The central bank raised rates 13 times between March 2010 and October 2011, a spree that extended well past the time central banks elsewhere were taking measures to revive growth.
India's headline inflation picked up for the first time in five months in February, to 6.95 per cent, on higher food costs but another measure of price pressures cooled, sparking market talk that a surprise rate cut might be in the offing.
J Moses Harding, head of the asset-liabilities committee at IndusInd Bank, said resistance within India's ruling coalition to Wednesday's railway fare increase may have prompted RBI Governor Duvvuri Subbarao to adopt a cautious stance.
"The ability of FM (Finance Minister Pranab Mukherjee) to manage fiscal deficit within acceptable levels is in doubt," Harding said. "RBI has affirmed the need to cut rates, but no clear indication on its timing and magnitude. The fear is that of delay beyond April."
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